FeaturedNationalVOLUME 18 ISSUE # 41

Pakistan’s trade deficit: challenges and prospects

Pakistan’s economic landscape is currently marked by a widening trade deficit, posing significant challenges for the nation’s development.

The Pakistan Institute of Development Economics (PIDE) highlights that declining exports have been a major contributor to this persistent trade imbalance, creating multifaceted hurdles that have plagued the country for over two decades. Amid this situation, the proportion of exports to GDP has dropped from 16% to 10%, signaling a need for strategic interventions to reverse this trend. Let us delve into the factors behind this decline, explore comparative global trade shares and the need to realize the critical importance of revitalizing Pakistan’s export competitiveness.

Pakistan is experiencing an expanding trade deficit, highlighting the crucial role of addressing this issue. According to the Pakistan Institute of Development Economics (PIDE), the decline in exports has emerged as a significant driver of Pakistan’s persistent trade deficit, posing a complex challenge that has afflicted the nation since the early 2000s. Over the last two decades, the contribution of exports to GDP has decreased from 16% to 10%.

Pakistan’s global trade share has dwindled from 0.15% in 2005 to a mere 0.12% in 2021. This erosion in export competitiveness places Pakistan at a disadvantage, especially when compared to countries like Bangladesh, India, and Vietnam, which have successfully expanded their export capacities. Several key factors have contributed to the stagnation of Pakistan’s exports, including low firm productivity, inadequate value addition and innovation, convoluted incentive mechanisms, restricted export markets, and insufficient investment in research and development.

To navigate the ongoing economic crisis and forge a more resilient path forward, it is imperative that we adopt a robust strategy to identify potential markets that align with our exportable products. A comprehensive literature review has unveiled the waning nature of Pakistan’s export competitiveness, particularly in comparison to peer countries such as Bangladesh, India, Vietnam, and Malaysia. The decline in our global export share is of particular concern, especially when measured against our regional counterparts.

A contrast was drawn between the trajectories of economies like Bangladesh and Vietnam in terms of export growth. Bangladesh, previously one of the poorest nations, has surpassed growth predictions with a robust export-driven economy. In contrast, Pakistan’s exports have remained stagnant at around 30 billion dollars, presenting a significant hurdle to its economic prospects.

Taking lessons from success stories like South Korea’s transformation from an agrarian economy to a tech-driven powerhouse, policy makers should understand that enhancing export competitiveness, boosting productivity, and fostering innovation are pivotal in breaking free from the cycle of stagnation. Overcoming the challenges posed by the current economic crisis demands collaboration across sectors – government, exporters, and economists – to identify potential markets and align them with our export capabilities. A swift response is paramount in building a thriving economic environment.

There is a pressing need for an extensive survey at the firm level to identify obstacles to productivity and export competitiveness. By collectively addressing these issues, Pakistan can chart a course towards economic recovery and resilience.

In July, Pakistani exports and imports experienced a double-digit decline, marking a significant drop compared to the previous month, according to data from the Pakistan Bureau of Statistics (PBS). The data indicates that exports fell by 12.7% in the first month of the current fiscal year, with a month-on-month drop of 8.6%.

Imports, as per the PBS data, also recorded a substantial decrease of 13.75% compared to the previous month, and a noteworthy 26.4% decrease compared to the same month in the previous year. The trade bulletin for July 2023 disclosed that goods exports amounted to $2.057 billion, down from $2.356 billion in June 2023 and $2.25 billion in July 2022. Meanwhile, goods imports in July 2023 were valued at $3.66 billion, a decrease from $4.2 billion in June 2023 and $4.98 billion in July 2022. This reduction in imports contributed to a 41.2% decrease in the trade deficit, which stood at $1.61 billion in July 2023 compared to $2.73 billion in July 2022. In June 2023, the trade gap was $1.86 billion.

The decline in imports was partially attributed to the government’s decision to ban several luxury items in an effort to manage the dollar shortage in the economy. Throughout the fiscal year 2022-23, the country witnessed a substantial reduction in the trade deficit, shrinking by 43% to $27.55 billion from $48.35 billion in the previous fiscal year. During the same period, total exports declined by 12.7% to reach $27.7 billion, while imports contracted by 31% to amount to $55.3 billion.

In conclusion, Pakistan’s trade deficit expansion calls for a proactive approach to address its causes and chart a path towards economic resilience. As it navigates these challenges, it is evident that boosting export competitiveness, enhancing productivity, and fostering innovation are essential pillars for sustainable growth. Drawing insights from success stories like South Korea, it’s evident that transformation is possible. However, collaboration across various sectors, including government, exporters, and economists, is pivotal to identifying potential markets and aligning them with our export capacities. Swift action, such as a comprehensive firm-level survey, can aid in identifying and overcoming barriers to productivity. By doing so, Pakistan can work towards reducing trade imbalances and securing a more prosperous future.